March 28, 2006 > New home sales and median prices both fall in February

New home sales and median prices both fall in February

by MARTIN CRUTSINGER, AP Economics Writer

WASHINGTON (AP), March 24 _ New home sales fell by the biggest amount in almost nine years in February while home prices declined for a fourth straight month, raising concerns that the once high-flying housing market could be in for a rougher-than-expected landing.

The Commerce Department reported Friday that sales of new single-family homes dropped by 10.5 percent last month to a seasonally adjusted annual sales pace of 1.08 million homes.

It was the second straight monthly decline, following a 5.3 percent fall in January, and marked the biggest one-month drop since April 1997.

The slowdown in sales further depressed home prices with the median price for new homes sold in February falling to $230,400, 1.6 percent below the January level. It marked the fourth straight month that the median, or midpoint for home prices, had fallen since hitting an all-time high of $243,900 in October.

Analysts, who had been forecasting a much more moderate drop of around 2 percent in February sales, said the big decline and downward revisions to sales activity in the previous three months could be signaling that housing will slow more this year than had been expected.

"The new home market looks like it is starting to stagger,'' said Joel Naroff, chief economist at Naroff Economic Advisers, a Pennsylvania forecasting firm. "Bubbles do burst, they really do.''

On Wall Street, the Dow Jones industrial average rose 9.68 points on Friday to close out the week at 11,279.97.

A crash in home prices is seen as one of the biggest threats to economic growth. Some analysts are worried that five straight years of record home sales, fueled by the lowest mortgage rates in a generation, spurred a speculative fever in housing similar to the forces that created a bubble in stock prices in the late 1990s.

The bursting of the stock market bubble in early 2000 wiped out $7 trillion in paper wealth and contributed to pushing the country into a recession in 2001.

With mortgage rates being pushed higher as the Federal Reserve raises rates to fight inflation, the worry is that home sales will slow further and put more pressure on prices. In addition, homeowners who stretched to buy homes with adjustable rate mortgages could be forced into foreclosures if they cannot meet the higher monthly payments as their mortgage rates readjust.

"The housing market is fading fast and the prospect is it will weaken further as rates move higher,'' said Mark Zandi, chief economist at Moody's Economy.com.

But other analysts said they believed the February decline overstated the weakness. They noted a report on Thursday showed that sales of previously owned homes actually rose by 5.2 percent last month, although that gain came after five straight declines in existing home sales.

David Seiders, chief economist for the National Association of Home Builders, said he still believed that sales of new homes will post a moderate decline of around 8 percent this year with home price gains slowing from double-digit increases of around 12 percent to about half that level.

He said that some of the hottest sales markets in areas such as California, Nevada and Arizona could see a bigger slowdown because a larger percentage of that sales activity has been driven by investors who might start dumping houses back on the market.

"If it pans out like we think it will, we will have a moderate slowdown and not a housing collapse,'' Seiders said.

Sales of new homes have fallen in four of the past five months with the sales rate of 1.08 million units in February the slowest pace since May 2003.

The slowdown in sales pushed the inventory of unsold homes up to a record of 548,000 homes at the end of February. At the February sales pace, it would take 6.3 months to sell all of the homes on the market, up from 5.3 months in January.

Analysts believe that the growing backlog of unsold homes will add to downward pressure on prices in the months ahead.

By sector of the country, sales were down by the largest amount last month in the West, a drop of 29.4 percent in February. Sales fell 6.4 percent in the South but they rose 12.7 percent in the Northeast and 5.2 percent in the Midwest.

In other economic news, the Commerce Department reported that orders to U.S. factories for big-ticket manufactured goods rose by 2.6 percent last month, the biggest gain since November. The strength reflected a 52.5 percent surge in demand for commercial aircraft, which rebounded following a big drop in January.

Outside of the volatile transportation sector, orders actually fell by 1.3 percent, but economists said the underlying trend for manufacturing remained strong.